MNI:Frugals Open To EU Debt Compromise, Spanish Presidency Key

The so-called “frugal” group of European Union countries are open to compromise to break a deadlock over reform of the EU’s fiscal rules, though much will ride on the ability of Spain, the incoming holder of the bloc’s rotating six-month presidency, to negotiate a deal even as it faces national elections, officials said.

The European Commission hopes for sufficiently speedy agreement over its recommended reforms to rules on member states’ borrowing contained in the Stability and Growth Pact to put them in place by the beginning of next year, when the Pact is due to come back into force following its suspension due to the economic impact of the Ukraine war.

But Germany, and the “frugals” – a loose grouping including Austria, the Netherlands, Denmark, Sweden and sometimes Finland – are unhappy with the Commission’s proposal to allow itself more leeway in designing bespoke debt reduction plans for countries exceeding the limits, and to permit them more time to comply.

“From our point of view there can be a compromise,” one official from a frugal country said, “but I have to say we would not be unhappy if Germany opposes everything because we can live with the existing rules just as well.”

SUPPORT FOR LINDNER

The frugals are likely to continue supporting German Finance Minister Christian Lindner so long as he insists on an automatic annual 1.0% cut in debt in excess of the stipulated limits, the official said.

German’s government has stuck to the common line on fiscal reform it set out in a non-paper in April, the official added, noting that any hope in Brussels that other parties in the country’s coalition could persuade Lindner, a free-market liberal, to soften his line, looks likely to be a dead end.

And at least one of the frugals, Finland, where the anti-immigration and eurosceptic Finns Party is set to join a new government coalition, could even toughen its line in the fiscal talks, the official said.

Meanwhile, officials in Spain are taking an optimistic view, despite concerns that elections set in the country for July 23 could leave it without a government until September. (See Spanish Elections A Blow To EU Fiscal Reform-Officials)

“I think it will fly. Work is very advanced at technical levels. And pretty much everyone is very in line or agrees on the general lines of the Commission. I would say that Lindner is the only one blocking and I don’t know to what extent he represents the German government or just his party,” one Spanish official said.

Madrid acknowledges that it will be difficult to approve the reform during its presidency but says it has a "realistic goal” of leaving the job almost done, so that it can be signed off in January or February during the Belgian presidency, the Spanish official said. He admitted though that Spain’s ability to usher talks towards a deal might be impacted if as polls predict a new right-wing government takes power later this year or even if the election is inconclusive.

GERMAN INSISTENCE ON DEBT REDUCTION

Senior EU and national finance officials met in Brussels on Thursday and Friday last week to prepare a discussion among EU finance ministers on the issue which will take place in Luxembourg on Friday, but have barely started the process of negotiation, according to one EU official.

Germany’s insistence that over-indebted countries reduce their excess by 1% of GDP a year is “unworkable and likely self-defeating,” the official said.

The outgoing Swedish EU presidency has told officials it will make no attempt at a compromise proposal before the conclusion of its presidency at the end of June.

“A lot will be up to the Spanish presidency. If they don’t manage to fix this by the end of year then I don’t think this is going anywhere,” the frugal source said.